Untraditional, unstructured, extraordinary amount, elusiveness, not quantified …these tags make ESG data rather challenging to comprehend in the context of sustainable investment. Could we use qualitative judgments as a substitution or we just quantify them whatsoever? No mention about the divergent rating results from various rating agencies ... These are the challenges that asset managers have to face when integrating ESG data into the investment process!
ESG considerations are fundamental to sustainable investment. A large amount of ESG data exists as qualitative information, which no doubt is important, however, it alone could not support investment decisions without quantitative measurement. If this remains unresolved, ESG investment would become empty talk.
At the 8th China SIF Annual Conference held on Dec. 1, distinguished speakers from pension funds, domestic and overseas asset managers, index company, ESG data providers, and academia conducted in-depth discussions on this subject. The perspectives and conclusions are not necessarily the same, but the discussions process and the collision of views present to be particularly valuable and inspiring.
The Swedish pension fund AP2 is a well-known pension in Northern Europe, with a record high net return after fees of 15.9% in 2019. During the period, Chinese stocks were the best performers among all asset classes, with a return of 52.6% in 2019. Ms. Eva Halvarsson, CEO of AP2 stated in the keynote speech of China SIF that the AP2 team has been attaching emphasis on sustainable development and ESG integration in investment decisions. AP2 has its own ESG internal assessment framework, while at the same time maintains active dialogues with investment targets on material ESG issues. She believes that ESG integration levels differ across companies and regions, thus both qualitative and quantitative analysis are indispensable and equally important. As the first Swedish pension fund to invest in China’s A-shares, Ms. Eva also shared their experience that when international index providers came to China and used a normal template to score the ESG work of Chinese companies, many companies got low scores due to their lack of transparency. But the Chinese managers helped to verify that in reality some companies were doing better than their quantitative ESG scores, in this case quantitative analysis alone is not enough.
Eva Halvarsson, CEO, Andra AP-fonden (AP2) [ONLINE]
Two leading Chinese mutual funds also shared their views of ESG investment practices.
Mr. Yang Yuebin from SPDB AXA believes: “In the realm of value investment, qualitative judgment must be preceded by quantitative analysis, that is, “It is better to be approximately right than precisely wrong.” ESG is a correct direction and innovatively combining value investment and ESG is a meaningful practice carried out by SPDB AXA in the capital market."
Yang Yuebin, Associate Director, Fund Manager, Equity Investment, AXA SPDB Asset Managers
Ms. Katherine Han from Harvest Fund said that qualitative analysis is important, especially in fundamental research, but effective investment advice still requires bottom-up objective judgment standards. She took the practice of in-depth ESG investment and research integration of Harvest Fund as an example, and said that not only in the local area, but also in the global ESG sustainable investment practice, the effective combination of ESG's qualitative judgment and quantitative factors is indispensable. In the new stage of high-quality development of China capital market, making full use of qualitative and quantitative ESG information can explore in-depth investment value more comprehensively, help investors obtain better quality and sustainable Alpha, and achieve a win-win situation between investment return and ESG performance.
Katherine Han, Head of ESG Research, Harvest Fund Management
In the panel session, speakers with a wide representation expressed their views on the qualitative and quantitative analysis of ESG respectively, as well as updated the audience with the current status of ESG ratings and data in the market, and shared their practical experience and research results.
Top middle: Zhao Yonggang, Director of Research and Development Dept., China Securities Index Co.
Top right: Desiree Wang, China Country Head, J.P. Morgan Asset Management
Bottom left: Louis Cheng, Professor of Finance, The Hong Kong Polytechnic University
Bottom right: Flora Wang, Director, Sustainable Investing, Fidelity International Limited
Ms. Desiree Wang from J.P. Morgan Asset Management said that ultimately we need a balance of both, a quantitative, data driven input layered with qualitative analysis. We’re a firm believer in active ownership — which allows for meaningful dialogue and engagement with companies on top of mind issues. In just a few years, ESG integration will become the new normal and ESG factors will be a core part of any investment process.
Ms. Flora Wang of Fidelity International, said that Fidelity’s fundamental analysis is based on “bottom-up” research, and their ESG integration approach takes into account both quantitative data and qualitative analysis. The quantitative gives the “what” while the qualitative explains the “why and how”, all of which are needed to make ESG assessment investment-relevant. Just as investment decision-making cannot only look at financial reports, it is necessary to combine the understanding of the industry and company by experienced investment managers and analysts to make overall judgments based on data. Investment stewardship also requires a combination of quantitative and qualitative analysis.
Ms. Miranda Zhao of China AMC shared the practice of ESG integration strategy. She believes that the core of ESG investment is to first make value judgments, and then carry out quantitative analysis afterwards. She explained that the ratings obtained by international ESG rating agencies such as MSCI and FTSE Russell using similar objective data are not very much correlated. In her opinion, quantitative analysis should serve as a concrete expression of qualitative judgment.
Miranda Zhao, Head of ESG Research, Global Capital Investment, China AMC
Mr. Zhao Yonggang of China Securities Index Company, believes that the role of ESG incorporate profitability and risk control is achieved through a long-term mechanism. He emphasized that in addition to risk control, rating agencies and investors should also shed light on the opportunity side. Companies that have high risks but actively strive to improve are also worthy of attention.
Professor Louis Cheng of the Hong Kong Polytechnic University introduced that although studies have shown that the results of ESG rating agencies are generally different, and the correlation is not high, showing a state of "aggregate confusion", but from his comments on SynTao Green Finance, MSCI and FTSE Russell’s research on ESG assessment results shows that different ratings have shown their respective advantages (Disaggregate Advantages) in the investment back test. The view is concluded in his research paper as "While there is an ‘Aggregate Confusion’ in ESG performance measures, but there is also a ‘Disaggregate Advantage’ in alpha generation".
Slide from Professor Louis Cheng
When moderating the discussion process, Ms. Grace Guan (Secretary-General of China Responsible Investment Forum, Deputy General Manager of SynTao Green Finance) used traffic lights to illustrate the relationship between ESG quantitative and qualitative analysis. Red and green lights are of qualitative nature, and the time setting of traffic light is quantitative. However, when it comes to setting the time of traffic light, should we set the time based on the walking speed of the elders and children, or just take the average speed as the criteria. Different people may have different views and perceptions. Therefore, for ESG investing, above the data and rating, more in-depth integration still depends on the understanding of the ESG issues and their materiality by individual investors and institutions.
Grace Guan, Secretary General, China SIF; Deputy General Manager, SynTao Greeen Finance